(01/31/13) China Can't Get Enough Silver

The one thing about having a population that exceeds a billion people is when just a fraction of that population begins to demand certain goods or services, you can count on prices for that good or service to rise, notes Tony Daltorio of Money Morning.

Twenty years ago, China was a very minor factor when estimating the direction of silver prices. Now the country is a major force both on the demand and supply side of the silver market.

In fact, a recent report issued last month by Thomson Reuters GFMS for the Silver Institute outlined how China's supply and demand was a major developing factor guiding silver prices in 2013—and the news is great for those investing in the white metal. Let's take a look.

China's Demand Factor
China's industrial use of the metal has rocketed higher, no doubt due to China's nearly uninterrupted economic growth over the past 20 years.

According to GFMS, China's offtake from fabrication demand grew from just 48.7 million ounces in 2000 to 159.5 million ounces in 2011. This represents a 12% annual increase during that period. That contrasts sharply with the rest of the globe. GFMS says that during that same period, fabrication demand posted a double–digit fall.

The industries with the largest offtake during that time period include those involved in infrastructure and the electrical and electronic markets. China also became the world's biggest silver jewelry maker in that time frame.

This brings us to investment demand for silver in China, which has also experienced a remarkable change since the turn of the century. China's investment demand for silver is set to jump 10% this year to a record amount, according to Chinese metals consultancy Beijing Antaike Information Development. Chinese investors prefer silver to the more expensive gold, as the country's individual investors enjoy rising incomes.

An analyst at Beijing Antaike, Shi Heqing, told Bloomberg News, "Chinese investors want hard assets such as silver, especially when it's cheaper than gold and requires less funding."

The GFMS report says that China is now the world's leading market for both physical investment into silver bars and coins along with "paper" trading of the metal. Nearly every bank in the country offers retail silver products such as bars to its customers. There are now three exchanges in Shanghai that offer trading in silver futures.

China and Silver Prices in 2013
The GFMS said that as long as the economy keeps growing in China, the country would continue to be a major force in the global silver market. The report stated "Both silver demand and supply are expected to achieve even further growth in coming years."

That is good news for US investors who have the same affection for the white metal. Money Morning Global Resources Specialist Peter Krauth agrees that silver will have a good 2013, forecasting silver prices to hit $54 an ounce this year.

For those investors not inclined to hold silver coins or bars, there are exchange–traded products that offer exposure to physical silver. Two such funds are the ETFS Physical Silver Trust (SIVR), up nearly 7% this year to $32, and the Sprott Physical Silver Trust ETV (PSLV), up 7.4% to $12.93 year–to–date.